Tongda Group (698.HK) Handset metal casing would continue fast growth

INSTITUTIONAL EQUITY RESEARCH Tongda Group (698.HK) Handset metal casing would continue fast growth Hong Kong TMT Company report According to the 2015H1 interim report, Tongda Group`s revenue increased 37.1% yoy, to HKD 2.881 billion; gross profit increased 40.5% yoy, to HKD 0.678 billion; and profit attributable to shareholders increased 76.1%, to HKD 0.294 billion; keeping the trend of speedy growth. With regard to various business segments, the revenue from handset casing segment, which was benefitted by sharp increase of demand for handset metal casings and improved capacity, surged 83.3% yoy to HKD1.756 billion, and became the Company`s main momentum of growth. The segment`s contribution to total sale turnover also increased from 45.6% to 60.9%. In addition, the Company`s gross profit margin increased by 0.6 ppts to 23.5%, stimulating the growth rate of net profit surpassing the growth rate of revenue. The Company constantly improved their technology and various segments won the recognition from more and more distinguishing clients, enabling market share to grow continually. Regarding handset casing business, Tongda involves in the production of the major handsets which have high sale turnover nationwide currently, with Xiaomi being the key client boosting growth in business in H1, contribution surged from 3% to 20%. There has been a trend of broad application of handset metal casing and market demand exceeds supply. With the Company`s mature technological competence like LDS, in addition to fast expansion of production capacity (the commencement of operation of plant in Dongguan in 2015Q4 is an example), the production capacity of handset metal casing would reach 30 million sets per year. Tongda would definitely be benefitted from such trend and its profitability is expected to be enhanced consistently The automotive interior components business was started since 2014, but it has won the recognition from domestic as well as international clients. Previously, the Company`s clients include BYD, Ford and General Motors etc and new clients of Geely and Mazda were gained in H1. The Company has started mass production for clients and the first patch of orders would be delivered by the end of this year. We believe that the market potentials of automotive interior components is huge and the gross profit margin is higher, even though the current contribution is rather low. As the Company has smooth development in this business segment and long term development of the Company is assured. Market share continue to grow Tongda Group has core competitive advantages, for example, technological advantage, in various areas; and the Company is consistently recognized by reputable clients, including Xiaomi and VIVO etc for handset casings; international clients like GE etc for electrical appliances; Geely and Mazda etc for automotive interior components. The market share of the Company grows consistently. Moreover, the business of handset metal casing expanded drastically and became the core growth momentum recently, and would enhance the profitability. Therefore, consistent speedy growth of the Company is expectable. The target price can be set as HKD1.9, which is equivalent to 12X of prospective 2016 EPS, with an upgraded rating of Buy. (Closing price at 21 Oct 2015) 23 October 2015 Buy (Downgrade) CMP: HKD 1.58 (Closing price at 21 Oct 2015) TARGET: HKD 1.90 (+21%) COMPANY DATA O/S SHARES (MN) : 5,726 MARKET CAP (HKDMN) : 9,047 52 - WK HI/LO (HKD): 1.75/0.77 SHARE HOLDING PATTERN, % Wang Yanan : 40.92 PRICE PERFORMANCE, % 1M 3M 1Y Tongda Group 16.18 0.64 58.00 HSI 10.51 10.61 58.43 PRICE VS. HSI Source: Phillip Securities (HK) Research KEY FINANCIALS HKD mn FY13 FY14 FY15E FY16E Net Sales 3627 4791 6221 7462 Net Profit 360 502 722 911 EPS, HKD 0.075 0.094 0.129 0.159 PER, x 21.2 16.8 12.3 9.9 BVPS, HKD 0.525 0.640 0.739 0.863 P/BV, x 3.0 2.5 2.1 1.8 ROE, % 15.2 16.9 18.5 20.1 Debt/Equity (%) 82.7 75.10 92.31 92.31 Source: Company reports, Phillip Securities Est. Research Analyst Fan Guohe (+ 86 21 51699400-110) fanguohe@phillip.com.cn Page 1 PHILLISECURITIES (HK) RESEARCH

H1 results demonstrated significant growth According to the 2015H1 interim report, Tongda Group`s revenue increased 37.1% yoy, to HKD 2.881 billion; gross profit increased 40.5% yoy, to HKD 0.678 billion; and profit attributable to shareholders increased 76.1%, to HKD 0.294 billion; keeping the trend of speedy growth. Rapidly grown performance Source: Company report, Phillip Securities (HK) Research With regard to various business segments, the revenue from handset casing segment, which was benefitted by sharp increase of demand for handset metal casings and improved capacity, surged 83.3% yoy to HKD1.756 billion, and became the Company`s main momentum of growth. The segment`s contribution to total sale turnover also increased from 45.6% to 60.9%. Moreover, segments of electrical appliance casings, notebook computers casings, communications facilities, and ironware parts each accounted for about 10% of total revenue, but only with average performance in the period under review. The above four segments demonstrated yoy growth of 1.3%, -21.9%, 13.4% and 11.2% respectively. In addition, the Company`s gross profit margin increased by 0.6 ppts to 23.5%, stimulating the growth rate of net profit surpassing the growth rate of revenue. Sales breakdown in 1H15 Source: Company report, Phillip Securities (HK) Research It is worth to note that the Company constantly improved their technology and various segments won the recognition from more and more distinguishing clients, enabling market share to grow continually. Regarding handset casing business, Page 2 PHILLISECURITIES (HK) RESEARCH

Tongda involves in the production of the major handsets which have high sale turnover nationwide currently, with Xiaomi being the key client boosting growth in business in H1, contribution surged from 3% to 20%. Even though revenue contributed from Huawei dropped 30% to 20%, an exclusive agreement was made between Tongda and Huawei on the production of a number of handset models, including golden Mate 7. Moreover, other clients of the Company include Coolpad, ZTE, Asus, Lenovo, Meizu, Letv, OPPO, Vivo etc. In the period under review, segment of electrical appliances also had two new reputable international clients namely Whirlpool and GE. Handset metal casing would continue fast growth There has been a trend of broad application of handset metal casing and market demand exceeds supply. According to the estimation, the contribution from handset metal casing for Huawei `s total handset casing would increase from 3% in 2014 to 20% in 2015 and 50% in 2016 respectively; while contribution for Xiaomi would increase from 8% in 2014 to 15% in 2015 and 25% in 2016. Handset metal casing of other brands is expected to surge from approximately 8 million sets in 2015 to 46 million sets in 2016; which is a sharp increase of more than five times. With the Company`s mature technological competence like LDS, in addition to fast expansion of production capacity (the commencement of operation of plant in Dongguan in 2015Q4 is an example), the production capacity of handset metal casing would reach 30 million sets per year. Tongda would definitely be benefitted from such trend. The Company`s sale turnover of handset metal casing in 2015H1 was approximately 3 million sets; and two to three times growth is expected in H2. Meanwhile, the Company`s contribution from handset metal casing in its handset casing is expected to increase from the current approximately 10%, to 20% in H2, and increase to 30-50% next year. Moreover, since the gross profit margin of metal casing is about 30%, which is higher than 25% of plastic casing, the Company`s profitability is expected to be enhanced consistently with the growth of revenue contribution from metal casing. Improved earning capabilities Source: Company report, Phillip Securities (HK) Research Promising prospect of automotive interior component business In the past ten years, the diversified product mix of handsets, notebook computers and electrical appliances supported the stable growth of the Company`s business. However, the current business of notebook computers has experienced a downturn and the Company has started to diversified business to production of parts like Page 3 PHILLISECURITIES (HK) RESEARCH

automotive interior components. It is worth to note that even though this new business was started since 2014, it has won the recognition from domestic as well as international clients. Previously, the Company`s clients include BYD, Ford and General Motors etc and new clients of Geely and Mazda were gained in H1. The Company has started mass production for clients and the first patch of orders would be delivered by the end of this year. We believe that the market potentials of automotive interior components is huge and the gross profit margin is higher, even though the current contribution is rather low. As the Company has smooth development in this business segment and long term development of the Company is assured. Catalyst Better than expected development of handset metal casing business; Rapid development of new clients. Risks Fierce competition leads to a price war in smart phone market; The new capacity is not put into operation as scheduled. Page 4 PHILLISECURITIES (HK) RESEARCH

Financials Periodicity: 2012 2013 2014 2015F 2016F Valuation Ratios Price Earnings 24.7x 21.2x 16.8x 12.3x 9.9x Price to Book 3.6x 3.0x 2.5x 2.1x 1.8x Dividend Yield 1.3% 1.6% 1.3% 1.9% 2.2% Per share data(hk$) EPS Adjusted 0.064 0.075 0.094 0.129 0.159 Book Value Per Share 0.441 0.525 0.640 0.739 0.863 Dividends Per Share 0.020 0.025 0.020 0.030 0.035 Growth & Margin Revenue growth 8.29% 6.42% 32.09% 29.85% 19.95% Gross profit growth 20.70% 9.22% 43.36% 33.23% 23.37% Net profit growth 19.85% 20.00% 39.44% 43.77% 26.20% Gross Margin 21.4% 22.0% 23.9% 24.5% 25.2% Operating Margin 13.1% 12.9% 14.5% 15.5% 16.2% Net Profit Margin 8.8% 9.9% 10.5% 11.6% 12.2% Dividend Payout Ratio % 31.8% 33.5% 21.2% 23.3% 22.0% Key ratios Return on Assets 7.6% 8.1% 10.0% 10.0% 10.4% Return on Equity 15.2% 15.2% 16.9% 18.5% 20.1% Liability ratio 47.84% 45.27% 42.89% 48.00% 48.00% Effective Tax Rate 16.8% 11.1% 14.6% 13.0% 13.0% Income Statement(HK$: mn) Revenue 3,408 3,627 4,791 6,221 7,462 - Cost of Goods Sold 2,677 2,829 3,648 4,697 5,581 Gross Income 731 798 1,144 1,524 1,880 - Selling, General & Admin Expenses 295 357 450 591 709 Operating Income 448 468 694 963 1,209 - Interest Expense 49 52 57 55 60 Pretax Income 401 415 642 903 1,144 - Income Tax Expense 67 46 94 117 149 Income Before XO Items 334 369 548 786 995 - Minority Interests 34 9 46 64 84 Net Profit 300 360 502 722 911 Source: Company, Phillip Securities (HK) Research Estimates (Financial figures as at 21 Oct 2015) Page 5 PHILLISECURITIES (HK) RESEARCH

PHILL Tongda Group(0698 HK) Company report PHILLIP RESEARCH STOCK SELECTION SYSTEMS Total Return Recommendation Rating Remarks >+20% Buy 1 >20% upside from the current price +5% to +20% Accumulate 2 +5% to +20%upside from the current price -5% to +5% Neutral 3 Trade within ± 5% from the current price -5% to -20% Reduce 4-5% to -20% downside from the current price <-20% Sell 5 >20%downside from the current price We do not base our recommendations entirely on the above quantitative return bands. We consider qualitative factors like (but not limited to) a stock`s risk reward profile, market sentiment, recent rate of share price appreciation, presence or absence of stock price catalysts, and speculative undertones surrounding the stock, before making our final recommendation GENERAL DISCLAIMER This publication is prepared by Phillip Securities (Hong Kong) Ltd ( Phillip Securities ). By receiving or reading this publication, you agree to be bound by the terms and limitations set out below. 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